TAAS-0045: Adaptation to Climate Change in the Hydro-electricity Sector in Nepal

Institutional Mapping and Assessment

Submitted by:

Nepal Development Research

Institute (NDRI)-Nepal

in collaboration with:

Practical Action Consulting (PAC),

Nepal

Global Adaptation Partnership (UK)

Limited (GCAP)

September 2016

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Table of Contents

Acronyms .............................................................................................................................. 1

Acknowledgments .............................................................................................................. 3

1 Background .................................................................................................................... 4

2 Stakeholder Consultation and Engagement Plan ........................................................... 4

3 Analysis of stakeholders in hydropower development .................................................... 4

3.1 Government Institutions .......................................................................................... 6

3.2 International Financiers and Development Partners ................................................ 8

3.3 Domestic Developers ............................................................................................ 10

3.4 Academic and Research Institute .......................................................................... 11

4 Regulatory framework on hydropower in Nepal relevant to adaptation ......................... 11

4.1 Electricity sector .................................................................................................... 12

4.2 Climate Change Adaptation and National Adaptation Plan (NAP) ......................... 16

4.3 Other necessary legal arrangements for development of water resources ............ 17

5 Mapping of Stakeholders and Possible Entry Points .................................................... 23

6 References .................................................................................................................. 36

List of Figures

Figure 3-1: Stakeholders in hydropower sector in project cycle ............................................. 5

List of Tables

Table 2-1: Stakeholder consultation and engagement plan ................................................... 4

Table 4-1: Overview of Electricity Act 2049 and Proposed Electricity Act 2065 ................... 13

Table 4-2: Overview of ETFC and NERC ............................................................................ 20

Table 4-3: Current regulatory framework on hydropower .................................................... 21

Table 5-1: Stakeholders and possible entry points .............................................................. 23

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This project, TAAS-0045: Adaptation to Climate Change in the Hydroelectricity Sector in

Nepal, is being undertaken at the request of the Government of Nepal, and is supported by

Climate and Development Knowledge Network (CDKN).

The work is led by Nepal Development Research Institute (NDRI)-Nepal in collaboration

with: Practical Action Consulting (PAC), Nepal and Global Adaptation Partnership (UK)

Limited (GCAP).

For further details, contact the team leader: Dr Divas B Basnyat, NDRI

divas@ndri.org.np

Telephone: +977-1-5537362, 5554975

The views expressed in this report are entirely those of the authors and do not necessarily

represent the Government of Nepal or CDKN’s own views or policies.

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Acronyms

ADB: Asian Development Bank

CC: Climate Change

CDKN: Climate and Development Knowledge Network

CEA: Central Electricity Authority

CERC: Central Electricity Regulatory Commission

CIAT: International Centre for Tropical Agriculture

CMIP5: Coupled Model Intercomparison Project Phase 5

COP: Community of Practice

CPF: Country Partnership Framework

CRA: Climate Risk Assessment

DFID: UK Department for International Development

DoED: Department of Electricity Development

DRR: Disaster Risk Reduction

EIA: Environment Impact Assessment

EIB: European Investment Bank

EPC: Engineering Procurement Construction

ESSD: Environmental and Social Studies Department

ETFC: Electricity Tariff Fixation Commission

FNCCI: Federation of Nepalese Chambers of Commerce and Industry

GCAP: Global Climate Adaptation Partnership

GCM: Global Circulation Model

GLOF: Glacial Lake Outburst Flood

GoN: Government of Nepal

GWh: Gigawatt hours

GWP: Global Water Partnership

IBN: Investment Board Nepal

ICIMOD: International Centre for Integrated Mountain Development

IEE: Initial Environment Examination

IFC: International Finance Corporation

IPPAN: Independent Power Producers’ Association

JICA: Japan International Corporation Agency

MCC: Millennium Challenge Corporation

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MIGA: Multilateral Investment Guarantee Agency

MoE: Ministry of Energy

MoPE: Ministry of Population and Environment

MoSTE: Ministry of Science, Technology and Environment

MW: Mega Watt

NAPA: National Adaptation Programme of Action

NDRI: Nepal Development Research Institute

NEA: Nepal Electricity Authority

NPC: National Planning Commission

NPPR: Nepal Portfolio Performance Review

ODA: Official Development Assistance

PAC: Practical Action Consulting

PDA: Power Development Agreement

PPA: Power Purchase Agreement

PROR: Peaking Run-of-River

PTC India: Power Trading Corporation of India

ROR: Run-of-River

USAID: United States Agency for International Development

WB: World Bank

WEC: Water and Energy Commission

WECS: Water and Energy Commission Secretariat

WGB: World Bank Group

WRA: Water Resources Act 1992

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Acknowledgments

This report is prepared under the study ‘Adaptation to Climate Change in the Hydroelectricity

Sector in Nepal’, carried out by the Nepal Development Research Institute (NDRI), Practical

Action Consulting (PAC, Nepal) and Global Climate Adaptation Partnership (GCAP, UK),

and funded by the Climate & Development Knowledge Network (CDKN).

The report is prepared by Dipendra Bhattarai of PAC, Nepal with initial inputs from Federica

Cimato of GCAP. Divas B Basnyat (Team Leader), NDRI, and other members of the study

team provided inputs to the report.

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1 Background

There is a range of stakeholders involved in hydropower development, from policy decision

makers, to developers and consumers. For a stakeholder consultation and engagement plan to be

effective, careful consideration needs to be given to three factors: target (who to engage with),

contents (what to communicate) and modalities (how to engage).

With this in mind, in the inception phase, the team carried out the institutional analysis and

reviewed the regulatory framework regulating the sector with a view to understanding the roles and

responsibilities of different actors in hydropower development, their exposure to climate change

impacts, the various mechanisms through which they do or could support adaptation, and their

influence. During the first phase of consultation, the team also started gathering information

regarding different stakeholders’ needs with respect to climate change adaptation, and their

support to the study.

This section describes the team’s approach to consulting and engaging with stakeholders, and

based on the findings of the stakeholder consultations, it presents a proposed strategy for the

stakeholder engagement.

2 Stakeholder Consultation and Engagement Plan

The project has the best chance of succeeding if it allows for feedback and input from major

stakeholders, representing Government, academia, private sector and civil society. To ensure that

the study is participatory and to create common ownership of its outcome, national stakeholders

were consulted to help in identifying priority issues (relevant for different stakeholders), to ensure

that the study is grounded within the national physical and political context, and to help identify

feasible potential options for addressing climate change impacts. The participation of government

staff, private developers, thematic experts and academia on a representative basis in the analysis,

and their engagement in the work, has helped on-site capacity building.

Table 2-1: Stakeholder consultation and engagement plan

Objectives Methods Outputs

Hold consultation meetings with Government and other relevant stakeholders/actors. Agree overall project governance, key indicators of success Identify entry points for adaptation options

Project Advisory Committee meetings Consultation Workshops One to one consultation with stakeholders

Formation of the Project Advisory Committee Stakeholder workshops held Entry points for adaptation options identified

The stakeholder engagement focuses on working directly with key Government, private and wider

stakeholders to address the key challenges and issues.

3 Analysis of stakeholders in hydropower development

In the hydropower sector, stakeholders face different incentives and constraints to adapt to climate change, and their ability to adapt and/or influence adaptation will vary depending on:

i) where in the project cycle a decision has to be taken, i.e. planning, design, construction, operation; and

ii) their adaptive capacity (e.g. access to finance, information etc.).

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These main stakeholders in the hydropower sector can be grouped as follows against the phases in the project cycle in Figure 3-1:

Planning Design Construction Operation

Planners

Regulators

Local Communities

Designers

Financiers

Owners

Operators

Consumers

Figure 3-1: Stakeholders in hydropower sector in project cycle

Planners and regulators are able to influence adaptation of hydropower mainly at the planning stage. They can prompt adaptation through policy instruments that have impact beyond the project level, i.e. at a system level. Regulators also determine thresholds for environmental impacts (e.g. environmental flows) that can affect the design of dams and how they are operated.

Project designers influence adaptation at the design stage. They decide on the plant’s capacity and technological designs, which in turn affect how well the facility is adapted to climate change. They can decide on applying safety factors (e.g. design for larger than normal loads or conditions), or build in flexibility features that allow for potential future modifications as climate change unfolds.

Financiers are also vested parties insofar as they face the same risks as the project owner of (1) the project not being completed on time, on budget, or at all; (2) the project not operating at its full capacity; (3) the project failing to generate sufficient revenue to service the debt; or (4) the project prematurely coming to an end. Debt usually starts to be served after construction is completed (or from commercial operation date (COD)) and continues during several years of operation (typically 12). Financiers have the ability to affect the economics of the project (i.e. the project needs to be economically feasible and generate enough revenues for debt service). Like regulators, financiers can impose environmental and social safeguards requiring design changes that ultimately may reduce the vulnerability of the project’s performance to climate change.

Developers, owners and operators have the greatest ability to affect adaptation during construction and operation. The owners (including shareholders) ultimately decide on what level and type of risk the project is willing to stand; and during the negotiations of the concession agreement (project development agreement, PDA, in Nepal) and power purchase agreement (PPA) negotiate with Governments on who bears the risk and responsibility for managing those risks. Operators will be responsible for taking adaptation decisions during the life of the project. The Government being the ultimate owner of hydropower projects in Nepal is the only actor having a long-term interest (>30 years) in the good functioning and safety of individual plants and the system as a whole.

Local communities should have the ability to affect the design of a dam to ensure that social impacts are avoided or mitigated. During operation they could also play a role in ensuring the risks of climate change are monitored, and mitigated. Their ability to adapt is however limited during

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construction (in fact during this time their adaptive capacity is expected to be lower and vulnerability to be higher during the construction period due to relocation, changes in livelihood etc).

Finally, electricity consumers are also relevant stakeholders insofar as they are directly affected by climate change risks through impact on services (e.g. unreliable supply) and could pay the costs of (hard) adaptation (e.g. trough higher tariffs if these are determined on a cost-plus basis).

3.1 Government Institutions

Ministry of Energy

The Ministry of Energy (MoE) and its Department of Electricity Development (DoED) have

jurisdiction over the energy sector in Nepal. The ministry has been entrusted with the task of

developing policies and plans for the conservation, regulation and utilization of energy. It designs

system plans and sectorial policies, and reviews and approves project proposals and feasibility

studies before they can be issued a license. The Ministry also leads on bilateral and multilateral

dialogues, agreements and understandings regarding energy and electricity.

Department of Electricity Development

The Department of Electricity Development (DoED) functions as the chief coordination unit for

promotion and development of the hydropower sector. It performs regulatory duties and is primarily

responsible for awarding licenses to hydropower projects. It is also responsible for developing

policies and programs for the development of the hydropower sector.

The main functions of the DOED are to process the license applications for survey and

development submitted by the proponent, and oversee the conditions of the licenses. It also

conducts feasibility studies of hydropower projects, and examines and reviews license

applications, environmental impact assessments (IEE/EIA) and associated reports, and sends to

Ministry of Energy and Department of Forest with its comments and suggestions. Besides, DoED

also acts as a secretariat of the Electricity Tariff Fixation Commission (ETFC), and prepares

guidance on environmental impact assessment and safety standards. However, these are poorly

enforced particularly on small projects, which are not subject to same level of scrutiny and due

diligence as large projects.

National Planning Commission

The National Planning Commission (NPC) is the advisory body responsible for the formulation of

national development policies, plans and programmes under the directives of the National

Development Council. It is responsible for preparing multi-year (3- and 5-year) development plans,

as well as supervising ministries’ plans and programmes to ensure they meet national and sectorial

objectives. NPC approves and monitors the execution of the budget (capital investment) by various

ministries.

On hydropower development, in coordination with MoE and NEA, NPC prepares plans which set

generation targets to be achieved through both private and public investment over a 3- and 5-year

timeframes. Besides, it facilitates the implementation of development policies, plans and

programmes requiring cross-departmental and ministerial coordination.

Investment Board Nepal

The Investment Board Nepal (IBN) was created under the Investment Board Nepal Act, 2011.The

Prime Minister heads the IBN, whose office is headed by the CEO who is also member secretary

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of the IBN. The IBN is entrusted to promote economic development of the country by creating an

investment-friendly environment.

IBN is a one-window service for potential investors in Nepal. It acts as a central agency for

investment promotion and facilitation through mobilizing and managing PPPs, cooperatives,

domestic and foreign investments, and supporting the development of infrastructure assets. In

addition, the office of the IBN can select priority areas for investment.

Large hydropower (above 500 MW) investment is under the remit of the IBN: IBN evaluates project

proposals with respect to their financial and technical feasibility, short list them, and lead the

negotiations for project development agreements with private developers on behalf of the

Government of Nepal. The IBN can access government as well as external expertise in order to

fulfil its mandate.

Water and Energy Commission

The Water and Energy Commission (WEC) was established as an advisory body of the

government for the formulation of policies, plans and programmes in the water resources and

energy sector. The Commission and its secretariat, the Water and Energy Commission Secretariat

(WECS), are responsible for formulating and assisting in developing policies and strategies in the

water resources and energy sector, and for providing suggestions, recommendations and

guidelines in developing irrigation, hydropower, and drinking water projects.

Besides, WECS is also mandated to formulate and develop policies and plans related to industrial

use of water, flood management and in-land navigation along with the protection of the

environment relating to the above sector. Specifically in hydropower, WECS contributes with DoED

and NEA to formulate system plans, and select hydro projects applying for a licence.

Ministry of Population and Environment

The role and responsibilities of the Ministry of Population and Environment (MoPE) include the

formulation and implementation of policies, plans and programmes that contribute to minimize the

impact of climate change, environment sustainability, preservation of natural resources, promotion

of sustainable practices and technologies, and management of climate change induced risks.

MoPE formulates, coordinates, implements, monitors, and evaluates National Environment

Protection Plan of Action, National Adaptation Plan of Action, National Adaptation Plan, Local

Adaptation Plan of Action, Local Adaptation Plan of Action Framework and its Manual.

As far as hydropower development is concerned, the Environmental Evaluation division of MoPE is

responsible to review and provide final go ahead for all environmental impacts assessments (EIA)

and associated reports prepared by developers during their scoping studies. The MoPE also has a

(separate) Climate Change Division responsible for drafting new policies, and implementing the

climate change related policies.

Department of Hydrology and Meteorology (DHM)

The Department of Hydrology and Meteorology (DHM) is an agency under the Ministry of Population and Environment (MoPE), Government of Nepal. DHM has a mandate from Government of Nepal to monitor all the hydrological and meteorological activities in Nepal. The scope of work includes the monitoring of river hydrology, climate, agro meteorology, sediment, air quality, water quality, limnology, snow hydrology, glaciology, and wind and solar energy. General and aviation weather forecasts are the regular services provided by DHM.

As a member of the World Meteorological Organisation (WMO), DHM contributes to the global exchange of meteorological data on a regular basis. The department is also a focal point for the Intergovernmental Panel on Climate Change (IPCC) and for the meteorological activities of the

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South Asian Association for Regional Co-operation (SAARC). The International Civil Aviation Organization (ICAO) has recognized DHM as an authority to provide meteorological services for international flights.

DHM collects and disseminates hydrological and meteorological information for water resources,

agriculture, energy, and other development activities. It issues hydrological and meteorological

forecasts for public, mountaineering expedition, civil aviation, and for the mitigation of natural

disasters. In addition, it conducts special studies required for the policy makers and for the

development of hydrological and meteorological sciences in the region. It also promotes

relationship with national and international organizations in the field of hydrology and meteorology.

Nepal Electricity Authority

The Nepal Electricity Authority (NEA) is a government-undertaking organisation that has as

primary objective to generate, transmit and distribute adequate, reliable and affordable power by

planning, constructing, operating and maintaining all generation, transmission and distribution

facilities in Nepal's power system both interconnected and isolated. The NEA also carry out market

analysis which is used to inform the Government (MoE and NPC) on short-term and long-term

policy and planning.

The NEA is the only energy off-taker in Nepal (monopsony). The different and conflicting functions

of the NEA are considered to be the root-cause of Nepal’s inefficient energy market; and many

stakeholders warrant restructuring and unbundling NEA with urgency.

In the fiscal year 2015-2016, domestic supply included 2168.56 GWh provided by NEA-owned

power stations with a share of 2168.49 GWh from hydro and 0.07 GWh from thermal, out of which

1173.14 GWh was generated by independent power producers (IPPs). Power purchase from the

IPPs and India (1758.41 GWh in 2016) is a major cost item in NEA’s operating expenses and, in

2015-2016, they saw 8.33 % decrease over the previous fiscal year's figure. In fiscal year 2015/16,

NEA suffered a net loss of NRs 7834.66 million (NEA, 2016)

NEA has Environmental and Social Studies Department (ESSD) within the Engineering

Directorate. The Department is responsible for conducting IEE and EIA including environmental

monitoring of NEA projects.

Electricity Tariff Fixation Commission

The Electricity Tariff Fixation Commission (ETFC) is an independent body, created in 1994,

responsible for tariff fixation. It studies, evaluates and decides electricity tariff. It is a seven-

member body headed by the chairman. . ETFC is meant to be an inclusive body that has

representation from the bureaucracy, the electric utility sector, industry, consumers, and

economists. The Member Secretary is the Director General of DOED and other five members

represent from MOE, NEA, FNCCI, independent economist, and consumer society.

In 2014, it was agreed that tariffs applied to the customers availing NEA’s power through dedicated

feeder would be based on the cost plus principle (NEA Annual Report, 2014). However, the ETFC

has been repeatedly been unwilling to adjust consumer tariffs unless the NEA’s improves its

inefficient operational performance.

3.2 International Financiers and Development Partners

The World Bank Group

In 2014, the portfolio of the World Bank Group (WGB) in the country was made of 20 active

projects worth USD 1,506 million (NPPR, 2014). The WBG organize activities within two pillars.

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Under the first pillar, it will support increasing economic growth and competitiveness, and will focus

on hydroelectric power generation, enhancing transport connectivity, and improving the business

environment. Under the second pillar, the WBG will provide support to increasing inclusive growth

and opportunities for shared prosperity, by enhancing the productivity of agriculture, equalizing

access to health care, skills development and social protection. In 2014, the WBG had USD 249.26

million committed to support hydropower and transmission line development in the country (WB,

2014).

In Nepal, IFC provides investment and technical advice to the private sector and Government,

particularly on hydropower investment. In 2014, IFC partnered with Indian Infrastructure Company

GMR Group to develop the 900-megawatt Upper Karnali hydropower plant (an export oriented

project) and two transmission line projects. The Multilateral Investment Guarantee Agency (MIGA),

which can provide political risk guarantees to investors and lenders, currently has no exposure in

Nepal.

The WBG is an important player in the hydropower sector in Nepal. Its influence is also exerted

through the Bank’s social and environmental safeguards, which apply to the project the WBG

finances. High due diligence standards are therefore guaranteed by the Bank’s scrutiny on large

projects.

In addition, the Bank has the obligation incorporate climate and disaster risk consideration into the

analysis of the country’s development challenges and priorities and, when agreed with the country,

incorporates such considerations in the content of the programs and the results framework1.

Specifically on hydropower, the Bank has been developing guidance on incorporating climate

change risks screening into project planning and design.

Asian Development Bank

In 2014, ADB had 37 active projects and programs in Nepal amounting to USD 1,554 million

(NPPR, 2014). Of this, 19% was on energy infrastructure, and 32% on urban and water supply.

The ADB supports institutional reforms in the energy sector, for example by advising on the

restructuring of the Nepal Electricity Authority and tariff regime revision.

Japan International Cooperation Agency

JICA has nine on-going program/projects in 2012/3 worth ¥19.07 billion (USD 166 millions) (NPPR,

2014). The economic infrastructure development area has received 92% of the allocation, followed

by democratization support (5%) and rural poverty reduction area (3%). As part of its objectives,

JICA aims to improve planning and facility establishment toward stable power supply as well as the

planning capabilities of Ministry of Energy, and the technical standards of Nepal Electricity

Authority.

JICA has been providing support to the Government of Nepal through the Power Generation and

Transmission Capacity Improvement Program, which includes technical assistance on Power

Generation and Transmission Capacity Improvement, Master Plan Study on Storage-type

Hydroelectric Power Development, and financial support together with EIB and ADB of ¥15.137

billion (USD 127millio) of ODA loan agreement for the Tanahu Hydropower Project (140 MW).

UK Department for International Development (DFID)

1 This requirement applies to all IDA Country Partnership Frameworks (CPFs), as per IDA 17 replenishment, Special Theme 3 on climate change.

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UK’s official development assistance during the period 2011-15 stands at £331 million. DFID’s

disbursement in 2012 – 2013 comprises climate change (17%), education (9%), governance and

security (31%), water and sanitation (4%), and wealth creation (29%). The largest support to the

hydroelectricity sector between 2011-14 was worth £12,8 milions of technical assistance to the

IBN. Also, DFID funds the Nepal Climate Change Support Programme (£11,85 millions), which

aim at increasing people’s resilience to climate change, as well as access to energy (NPRR, 2014).

USAID/MCC

In 2014, USAID/Nepal had 11 active projects worth USD 71 million (NPRR, 2014). The portfolio

covers on democracy and governance, climate changes, agriculture and food security, inclusive

growth, and health sector.

The Millennium Challenge Corporation (MCC) has been developing a Threshold Program for

Nepal, which plans to specifically focus on improving the enabling policy environment for both

transportation infrastructure and hydropower generation (USAID, 2014).

EU/ European Investment Bank

In 2013, The EIB signed its first loan (EUR 55m) to the Government of Nepal to finance the

construction and operation of the Tanahu hydro plant (140 MW).

Denmark

Denmark’s portfolio in 2012-13 was approximately $40 million, of which 41% in renewable energy.

But recent development is that they have pulled off hand.

Norway

Nepal receives annually NOK 200 million from Norway, of which NOK50 for clean energy and

climate change.

3.3 Domestic Developers

According to the NEA (2014), by the end of fiscal year 2013/14, 148 PPAs have been signed.

Upon projects’ completion, these would generate nearly 2,000 MW of installed capacity. In 2014,

the total number of IPP-owned projects that were in operation was 39 with a combined installed

capacity of 255.65 MW.

Independent Power Producers’ Association, Nepal (IPPAN)

Independent Power Producers’ Association, Nepal is a non-profit, non-government autonomous

organization that was established in 2001 to encourage private sector investment in hydropower in

Nepal. One of its main purposes is to act as a link between the private sector and government

organizations involved in developing hydropower in the country. Besides this, the organization also

helps exchange technology, expertise, knowledge, financial and management information among

the independent power producers in the country.

Nepal Hydropower Association (NHA)

Nepal Hydropower Association (NHA) is an association of individuals those working in hydropower

sector such as students, engineers, lawyers, economists, professors, and environmentalist. NHA’s

major objectives are to lobby and advocate on helping create better enabling environment for

hydropower development; provide capacity building support to hydro professionals, and investors.

NHA can be one of the entry points to advocate on adaptation measures in hydro sector in Nepal.

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3.4 Academic and Research Institute

International Centre for Integrated Mountain Development (ICIMOD)

ICIMOD is a regional intergovernmental learning and knowledge sharing centre serving the eight

regional member countries of the Hindu Kush Himalayas – Afghanistan, Bangladesh, Bhutan,

China, India, Myanmar, Nepal, and Pakistan – and based in Kathmandu, Nepal. Globalization and

climate change have an increasing influence on the stability of fragile mountain ecosystems and

the livelihoods of mountain people. ICIMOD aims to assist mountain people to understand these

changes, adapt to them, and make the most of new opportunities, while addressing upstream-

downstream issues

ICIMOD being a regional organization has been actively working in the water and energy sector.

Recently, they have published a policy brief entitled “Benefit Sharing and Sustainable Hydropower

in Nepal”. They also have programme on monitoring the glaciers in Hindu Kush Himalayan Region

both remotely and on field. ICIMOD also undertakes research on climate change including its

impacts on cryosphere and serves as a knowledge hub for climate change impacts in the Himalay-

Hindu Kush region including Nepal.

Institute of Engineering (IOE)

IOE is one of the oldest and largest engineering institutes under affiliation of Tribhuvan University.

IOE offers PhD, graduate and undergraduate courses in different disciplines in different campuses

and colleges. There are mainly six departments namely Civil Engineering, Mechanical Engineering,

Electronics & Computer Engineering, Electrical Engineering, Architecture & Urban Planning, and

Science & Humanities.

International Water Management Institute (IWMI)

IWMI is one of the leading organisation that has strong research base to provide evidence based

solutions on sustainable water management, land resources for food security, livelihoods and the

environment. Under CGIAR Research Programs WIMI hosts Water, Land and Ecosystem program.

4 Regulatory framework on hydropower in Nepal relevant to

adaptation

Regulatory framework relevant to electricity sector and climate change adaptation

The main legislation governing hydropower in Nepal is the Electricity Act 1992 and its

regulation, the Electricity Regulation 1993. The Water Resource Act 1992 and the Water

Resource Regulation 1993 also contain provisions regarding the use of water for hydropower

generation2; and the Environment Protection Act (1996) and Regulation (1997) contains

provisions on the environmental safeguards to be applied on hydropower projects. In 2011, the

Government of Nepal adopted a Climate Change Policy, which contains some provisions

concerning hydropower development as well. Table 4-3 lists existing regulatory framework in

hydro-electricity sector in Nepal.

2 Neither the Electricity Act 1992 (2049 BS), nor the Electricity Regulation 1993 (2050 BS), explicitly provide for a right to

use water for hydropower. However the Constitution of the Kingdom of Nepal, under Article 12, guarantees the freedom

to practice any business or profession, which would therefore include hydropower (WaterAid, 2005).

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4.1 Electricity sector

The Electricity Act 1992 and its Regulations regulate the electricity sector by a system of licensing.

To obtain a license for the survey, generation, transmission or distribution of electricity, an

application form must be submitted to the Secretary of Ministry of Energy (MOE) through

Department of Electricity Development (DOED) along with a financial, technical and environmental

study report. A survey license lasts for 5 years, meaning that during this time frame the developer

has to complete the engineering studies and investigations, environmental studies, PPA and

connection agreement and financial closure.

The Water Resource Act (WRA), 1992, Electricity Act, 1992 and Hydropower Development Policy,

2001 require that developers conduct an environmental study. Section 8 of WRA, 1992 requires

preparation of an environmental study report by the proponent who wants to conduct survey or

utilize water resources. Similarly Section 4 of the Electricity Act, 1992 requires preparation of an

environmental study report by proponent desiring to conduct survey of production, transmission

and distribution of electricity. The Hydropower Development Policy, 2001 encourages national and

foreign private investors invest in electricity sector to develop hydropower projects in such a way

that it would have minimum impacts on the environment.

For hydropower projects that produce electricity of more than 1000kW, transmit electricity through

33kV or more, and distribute electricity through >1MVA transformer, the developers must conduct

environmental assessment before implementation. Initial Environmental Examination (IEE) and

Environmental Impact Assessment (EIA) reports should be approved from the concerned body

(ministry related to project, i.e., MoE) and the Ministry of Science, Technology and Environment

(MoSTE), respectively. The main difference between the two is that IEE does not require scoping

and public hearing, and its scope is generally limited to a list of anticipated impacts and mitigation

measures to be implemented.

Despite the characteristics of a project, an EIA is required for projects located in any of the

following areas: (i) historical, cultural and archaeological sites; (ii)environmentally weak and wet

areas; (iii) National Parks, Wildlife Reserves and Conservation Areas; (iv) semi-arid, mountainous

and Himalayan regions; (v) flood-prone and other dangerous areas; (vi) residential, school and

hospital area; and (vii) areas with main sources of public water supply (GoN, 2006).

EIA has to identify, predict and evaluate potential environmental impacts, both beneficial and

adverse impacts, and propose mitigation measures for significant adverse impacts, and

enhancement measures for beneficial impacts. The EIA also has to contain recommendations on

environmentally appropriate alternatives, and a framework for environmental monitoring,

environmental auditing and environmental management plan. However, the EIA does not require

developers take climate change into account in their environmental assessment.

In 2001, Nepal developed a Hydropower Development Policy. At the time of this report, the

policy has not yet been followed by a supporting legal framework, though it is being used and

referred to during negotiations of project development agreements (PDA). The Policy makes no

reference to climate change adaptation, yet it lays out a strategy and policy objectives for hydro

development whose implementation and achievement should require climate change

considerations. For example, the Policy’s strategy refers to the need to build small, medium, large

and storage projects for hydropower development focusing on national interest, environment

protection, and to maximize benefits in the development of water resources of Nepal. Also, it

provides for minimizing the potential risks in hydropower projects with a joint effort of government

and private sector, and in that respect it requires to make provisions for allocating risks to either

the government or private sector based on their capability to bear them at the lowest cost. In order

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to implement the strategy, a good understanding of climate risks is required.

Based on Interim Constitution of Nepal 2007, GoN has proposed a draft Electricity Act 2065 which

has however not yet been ratified by the Parliament and is therefore not legally binding. Proposed

electricity act 2065, in general, is more comprehensive in electricity development than the

prevalent act, Electricity Act 2049 (1992). It is more focused towards rapid hydropower-

development in Nepal. The act has opened more space in development of small plants (< 3MW) by

removing license requirement condition and also relaxed the environment impact assessment need

for projects less than 50MW. The act is aimed towards better management considering the nature

of electricity plants and its capacity; and nature of work. This includes provisions for terms of

license, transfer of license, power purchase agreement, royalty, security and other provisions. It

also obligates the developers for insurance of power projects and as such, has introduced risk

management practice into law. The proposed draft act has also defined the water rights to

hydropower developers. One of major provision in the proposed act is providing right to a new

regulatory body, the proposed Nepal Electricity Regulatory Commission (NERC) to fully regulate

the power sector beyond just economic regulation currently carried out by the Electricity Tariff

Fixation Commission (ETFC). With regards to protection of environment, the proposed act has

explicitly guaranteed the amount of ecological flow in rivers. The act also emphasizes on local

development and rural electrification. Besides, the provision for compensation to affected people,

reestablishment and resettlement, and priority to local people are more elaborate and clear than

the current Electricity Act 2049 (1992). Table 4-1 provides a comparative overview of Electricity

Act 2049 (1992) and Proposed Electricity Act 2065.

Table 4-1: Overview of Electricity Act 2049 and Proposed Electricity Act 2065

Aspect Electricity Act 2049 Proposed Electricty Act 2065

Capacity of HPP not requiring license for survey, generation, transmission or distribution

100-1000KW 100KW - 3MW

Time-duration for issuance of license

Fixed time for all HPPs Varied time based on installed capacity

Multiple License to single person or corporate body

Not mentioned No

Terms of license for HP Maximum 5 year for survey Maximum of 50 years for generation, transmission or distribution

For survey 1 year for IC < 100MW 2 years for IC>100MW For generation 35 years For transmission , distribution or trade - Maximum of 25 years

Renewal of license One year before license expiry data

By 3 months expiry date for survey 2 years before expiry date for generation, transmission or distribution

Transfer of license Not mentioned Provision for transfer

Electricity development and operation under competition

Not mentioned Provision

Buyer

Buyer - Nepal Government Buyer - Corporate body with license transmission, distribution or trade

Power purchase agreement

Not clear Necessary

Royalty Fixed based on domestic Categorization based on

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and export Installed capacity

Tariff fixation authority Formation of Electricity Tariff Fixation Commission

Nepal Electricity Regulatory Commission

Insurance of HP infrastructure

Not mentioned Mandatory till transfer of infrastructure to GoN

Water rights No license shall be issued

to any other person or

corporate body for the

distribution of electricity in

the same area for the

distribution of electricity in

the same area for the whole

term of such license

No definition of water rights

Definition of water right given for production of hydro-electricity

Environment

River ecology Not clearly mentioned about ecology Only mentioned that during generation, transmission and distribution environment should not be adversely impacted.

Define the amount of ecological flow: Maximum of (a) ecological flow mentioned in EIA report or (b) 10% of minimum monthly average flow

EIA / IEE Environmental report is needed

Only IEE is required for HPP <=50 MW

Social responsibility Only basic compensation to affected is discussed.

More elaborate in terms of land acquisition of land and property; and their compensation. Provision for reestablishment and resettlement Priority of local area and local people

Investment Not clear Defined who can and how

Micro-hydro and rural electrification

HPPs must allocate certain amount of hydro-electricity for rural electrification. Provision of certain portion of royalty to local body and rural electrification

Amidst the ongoing energy crisis, GoN has also developed the concept paper on ' National Energy

Crisis Mitigation and Electricity Development Decade (Magh 2072 (Feb 2016))'. The objectives are

(a) To identify and implement actions to end current energy crisis within one year (b) To provide

energy security within 10 years through sustainable electrical energy development (c) To promote

development of 'clean energy' focusing on hydropower as reliable source. Major action plan

includes:

1. Declaration of Hydropower development decade from 2072/73 to 2082/83

2. To end the current load-shedding

Production targets

To produce 1450 MW of electricity in coming three years from projects under construction-

200 MW in first year, 850 MW in second and 400 MW in third year.

15

To implement policy to connect solar and wind energy to national grid such that its upper

limit is 10% of added IC (100 MW in first year and 200 MW in second year)

Transmission targets

To construct international transmission line from Dhalkebar to Mujjaffar

Distribution targets

To develop distribution master plan and leakage control master plan in one year

To implement peak-off peak tariff and implement Time of the Day (TOD) meter system to

reduce peak-load and to distribute load in off-peak hours to domestic power supply

Policy Decision

To evaluate 'National Energy Security policy' within 6 months

To implement 'Take or Pay' system instead of 'Take and Pay' system in PPA in case of

RoR projects with COD within 2082/83

To facilitate bank or financial institutions to implement 15% of total investment in

hydropower sector

Accepting the Baisakh 2071/72 earthquake as Force Majeure, - to extend RCOD for

affected under-construction hydropower and and PPA by maximum of one year for affected

operating projects

Administrative and process management

To waive penalty to HPP less than 10 MW if energy production decreases than contracted

energy in PPA

Rules and Regulation

To pass Energy Crisis Bill in legislation parliament

To continue facility of VAT rebate of NRs 5 million per MW upto 2082/83 to HPP developed

for internal consumption

To continue income tax rebate (based on Electricity Act 2049) till upto 2082/83

3. For holistic and sustainable development of electric energy including hydro-power and

alternative energy

Policy

To fix Generation mix for long-term end of load sheeding as Storage and Pumped Storage

projects 40-50%, PRoR 15-20%, RoR 25-30% and alternative energy 5-10%.

To fix electricity tariff based on season and time as demand side management to promote

investment and to improve financial status of NEA

To fix purchase price based on season and time to promote environment for construction of

PRoR and storage HPP

To promote investment (shares) in big and attractive HPP - 51% of total investment shares

from government and financial institutions and 49% from remittance / cooperative / people

Planned Rural Electrification

To conduct pilot project in Kathmandu for 'Smart Meter' and 'Smart Grid'

Process

To forecast load based on actual demand and not on 'supressed demand'

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Institution

To develop district level Energy Crisis Reduction coordination committee

To restructure WECS to update production/transmission/distribution master plan, load

forecast, analysis Techno-economic clearance. To update river basin master plan within

coming 2 years

To development government company for planned and under-construction storage project.

To have rapid progress on work on West Seti HPP

To establish one National electricity production company by studying medium and large

scale HPPs to meet medium and long term demand

To restructure NEA based on Federal structure and establish Electrical Boundary

To establish National Electricity Trade company to export and import electricity

Constitutional Arrangement

To evaluate and propose bill on new electricity act and National Electricity Regulation

Commission to replace Electricity Act 2049

To form Electricity Energy Crisis Mitigation Committee headed by Prime Minister

4.2 Climate Change Adaptation and National Adaptation Plan (NAP)

The Government of Nepal established the Climate Change Management Division in the then

Ministry of Science, Technology and Environment (MoSTE) in 2010. The then MoSTE prepared

the National Adaptation Programme of Action (NAPA), which was endorsed by the Government

in September 2010, and developed Local Adaptation Plans of Action (LAPAs) to implement

adaptation programmes. With respect to the NAPA, since the global climate models and a

composite national vulnerability index both failed to provide a practical information base, the

MoSTE met the NAPA guidelines set by the United Nations Framework Convention on Climate

using participatory methods to gather information from locations spread along three north-to-south

transects across the country (Dixit, 2012).

Having recognized that climate change can result in adverse impacts for water resources and

infrastructure, the Nepalese Government designed a Climate Change Policy (2011) to implement

climate adaptation-related programmes, and take measures to mitigate adverse impacts. The

Policy also aims to support the adoption of a low-carbon development path by pursuing climate-

resilient socio-economic development; and develop capacity for identifying and quantifying present

and future impacts of climate change, adapting to climate risks and adverse impacts of climate

change.

Amongst the multiple activities foreseen in the Policy, there is that of monitoring the status of

glaciers and glacier lakes through studies, and implement adaptation activities in priority vulnerable

glaciers; forecasting water-induced disasters and risks resulting from climate change, and

providing early warning information; developing necessary mechanism for the implementation of

preventive measures; ensuring regular supervision, and enhancing capacity. Also, the Policy

recognized the need to formulate and implement design standards for climate resilient

infrastructure such as bridges, dams, river flood control and other infrastructure.

Based on National Adaptation Programme of Action (NAPA) that aimed to address impacts of

climate change and National Framework on Location Adaptation Plan for Action (LAPA) to localize

and ensure integration of climate change adaptation into local to national planning process, the

National Adaptation Plan (NAP) formulation process in Nepal was initiated to prepare necessary

instruments for identifying medium- and long-term adaptation needs, and responding to the

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decisions of the Conference of the Parties to the United Nations Framework Convention on

Climate Change (UNFCCC) on the NAP process.

In Least Developed Countries (LDCs), NAP process will build upon the experiences in preparing

and implementing NAPAs, as a means of (a) identifying medium- and long-term adaptation needs;

and (b) developing and implementing strategies and programmes to address adaptation needs.

The NAP aims to reduce vulnerability to the impacts of climate change by building adaptive

capacity and resilience. The objective is to facilitate integration of climate change adaptation, in a

coherent manner, into relevant new and existing policies, programmes and activities, in particular

development planning processes and strategies, within all relevant sectors and at different levels,

as appropriate..

Understanding the urgency for enhancing initiatives to address medium- and long-term adaptation

needs, the Government of Nepal, the current Ministry of Population and Environment (MoPE) –

focal point for UNFCCC – launched the NAP formulation process in September 2015. This paved

the way to explore supports, promote wider participation and engagement of partners and involve

professionals in NAP process technical team. Nepal's NAP has received initial support from Action

on Climate Today (ACT), a UK-Aid funded initiative.

Nepal's NAP process builds on NAPA experiences, and maintains a country-driven, participatory,

multi-disciplinary and gender-sensitive approach. The MoPE is leading the national process to

identify and prioritise medium- to long-term adaptation actions.

In the NAP formulation process to cover the climate change affected sectors, the MoPE is working

through seven thematic working groups- (i) agriculture and food security (including nutrition); (ii)

forest and bio-diversity; (iii) water resource and energy; (iv) public health (including water and

sanitation); (v) climate-induced disasters; (vi) urban settlement and infrastructures; and (vii)

tourism, natural and cultural heritage. Similarly, the two cross-cutting working groups are also

included in the process, which are gender and marginalized group (social inclusion); and

livelihoods and governance. The MoPE established the Technical Committee under the chair of the

UNFCCC focal point for necessary coordination at technical level. The MoPE works with the

concerned ministries to identify critical areas of technical support and capacity needs to formulate

a comprehensive NAP document.

4.3 Other necessary legal arrangements for development of water resources

The Project Development Agreement (PDA) is the concession agreement between the

Government and developers for the use of water resources for hydropower generation in Nepal.

The concession agreement timeframe is 30 years for export-oriented projects, and 35 years for

domestic projects. The PDA lays out obligations and risk sharing between the government and the

developers in constructing, operating and managing the hydropower plant for the duration of the

concession agreement. In 2012, with the support of international donors, the PDA template for

export-projects (above 500 MW) was revised and brought up to international standards, and

endorsed by the Nepalese Government. A similar template is being currently used to inform the

negotiations of domestic projects as well, though the Government has not yet officially endorsed it.

Unless waived in writing by government, the company should satisfy different conditions. The

company should have obtained the generation license, transmission license and any other

government approvals. It should submit the performance security to the GoN. The company should

have submitted to the GoN evidence confirming that the project is capable of achieving financial

close. The company should have demonstrated to the GoN’s satisfaction that the project’s revenue

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objective has been achieved as: a. in relation to the export/domestic power purchase agreement

by obtaining relevant approval from the relevant importing country’s electricity regulatory

commission; b. in relation to the sale of power on merchant basis where price and volume of power

are determined in open, competitive and approved electricity trading markets; and c. where the

sale of power is bilateral, long-term basis between the company and a third party, the price and

volume terms of such bilateral power purchase agreement achieves for the project the highest

feasible proportion of the export energy alternative cost.

The company should be solely responsible for the project in accordance with the project

specifications, applicable plans, and design standards. The hydro property should be fit for the

purpose and carried out to the specified level of skill, care and diligence such that the hydro

property is designed to achieve a minimum economic operating life of: a. 100 years for all civil

works in the head works, including storage dam spillway, diversion weir, barrage, dam; b. 50 years

for all other civil works and transmission line; and c. 30 years for all electrical and mechanical

plants and their components. The generation license and the transmission should be issued for a

period of 30 years in accordance with Electricity Act 2049.

The PDA template does not make specific reference to climate risks, yet it contains provisions

governing potential climate-induced risks, such as force majeure and the management of GLOFs,

as well as provisions concerning the handover of the project. Within one year of effective date, the

company should conduct a study of potential effects on the Hydro Property of a glacier lake

outburst flood. Upon completion of such study, a full and detailed report should be submitted to the

GoN. If the GoN in consultation with the technical review panel determines that the installation of

an early warning system in respect of a GLOF is required, the company should establish such a

system at its own system in consultation with GoN.

The PDA document describes the Force Majeure Event as any event or circumstances or

combination of events or circumstances beyond the reasonable control of the affected party, but

only to the extent that such circumstance, event or condition, despite the exercise of diligence and

good electricity industry practice, cannot be prevented, reasonably anticipated, avoided or

overcome by affected party; such circumstance, event or condition prevents the performance by

the affected party of its obligations under the agreement; the affected party has taken all

reasonable precautions, due care and measures to prevent, avoid or overcome the effect of such

circumstance on its ability to perform its obligations under this agreement and to mitigate its

consequences; such condition is not direct or indirect result of a breach or failure by the affected

party to perform any of its obligations under the agreement and such event or circumstances is

without fault or negligence of the affected party. Other Force majeure events include the events or

circumstances of earthquake, devastating flood, GLOF, storm of an historically exceptional nature,

cyclone, typhoon, hurricane, lighting etc provided that where such events affects the hydro

property or any other facility or equipment; events or circumstances such that fire to the extent

such fire is beyond the design specifications and/or design standards of the hydro property or

facility or equipment, explosion, landslides; epidemic or plague; any strikes, lock-outs, industrial

disputes, industrial difficulties, work bans, blockages, picketing or similar action; any act of war or

conflict; any acts of rebellion, riot, civil commotion, strikes of a political nature, act of terrorism; any

radioactive contamination or ionizing radiation, toxic or dangerous chemical contamination,

excluding circumstances where the source or cause of contamination or radiation is brought or has

been brought into or near the site of contamination or radiation by the company.

The PDA also contains provisions regulating the handover of projects back to the Government. On

the date of expiry of the concession agreement, the developer has to transfer all of its rights, title

and interest in the project in good running condition to the Government free of cost and without any

19

liabilities to the Government. The PDA template also states that two years prior to the date on

which the project is to be transferred to the Government, the developer will arrange for training, at

its own cost and expense, of a sufficient number of staff of the Government to enable the

Government to operate, maintain and manage the project to the standards required. The company

should arrange training to the date on which the project is to be transferred at its own cost and

expense to sufficient staff of the government. The parties should mutually agree the number of

employees to be trained and the content, duration and period of training in order to satisfy the

obligations on the company. Prior to the effective date and in accordance with the application for

the generation license, the company should provide to the government performance security at the

rate of 0.5 percent of the total of the total project cost determined at the feasibility study level or

any other updated and/or upgraded study conducted thereafter per MW of installed capacity of the

project. The company should pay capacity royalty and energy royalty to GN pursuant to the laws of

Nepal in force.

PDA describes the EIA and IEE. The company should prepare and conduct the EIA/IEE in

accordance with the laws of Nepal, key guidelines and plans. It should include consideration of the

access roads, power house, embankments, tunnels or canals, headworks, camps etc. company

should produce the executive summary of the EIA/IEE in both English and Nepali languages.

Company should submit the EIA/IEE to GoN for approval. The approved EIA/IEE should be an

integral part of this agreement and the project, and the company should comply, and promptly

rectify any non-compliance, with environmental, occupational, health and safety requirements

detailed in the approved EIA/IEE and the plans.

For the resettlement and rehabilitation, the company should comply with i. the local procurement

and development plan, ii. The employment and skills training plan, iii. The corporate social

responsibility plan, iv. The rehabilitation and resettlement plan, v. environment management plan,

vi. The environmental impact assessment report, vii. The initial environmental examination report,

viii. The Nepal benefits plan. The company should resettle, rehabilitate and compensate project

affected people in accordance with the plans. The company should implement the rehabilitation

and resettlement plan to ensure that the living standards and livelihood of the project affected

people shall be higher than the standard prevailing sixty days before the agreement date.

Power Purchase Agreement (PPA) and Consumer Tariffs are also relevant in shaping the

incentives and barriers to adaptation. PPA rates are those NEA or the off-taker pays to energy

producers. PPA rates are negotiated on a project-by-project basis and for Nepalese producers

average NRs. 4.44 per KWh (Asia Foundation, 2014). Current PPA rates are of two types, one for

winter months from mid-December to mid-April and other for the other eight months. The former

rate is approximately twice as much as the latter rates. PPAs for export-oriented projects are

negotiated between developers and the foreign off-takers (e.g. PTC India). In the case of projects

exporting to India, tariff rates are set on a cost-plus basis and regulated by the Indian authorities

(CERC and CEA).

NEA has been running financial losses for several years, with losses amounting to NRs 5.7 million

in 2014 only. The organization points to low consumer tariffs (and hence the price-cost gap) as one

of the main drivers for such poor performance. The NEA is also currently facing difficulties in

meeting its financial obligations under US dollar-denominated PPAs, which are subject to

exchange rate fluctuations.

Tariff rates are determined by the Electricity Tariff Fixation Commission (ETFC), which is

responsible for reviewing and approving tariff requests made by the NEA and other licensed

authorities under the Electricity Act of 1992. In FY 2011/12, ETFC approved to increase tariff by

20% while instructing NEA to comply with certain conditions regarding loss reduction, inventory

20

management, receivables management and administrative reform (NEA Annual Report, 2014).In

2013/14, the NEA requested the ETFC to approve a further increase in consumer tariffs. However,

ETFC has been reluctant to approve such increase unless NEA undertakes further reforms and

improves its operational performance. Starting mid-September 2016, electricity tariff has been

planned to increase by 19 per cent, as decided by the ETFC (The Himalayan Times, 2016).

Nepal Electricity Regulatory Commission (NERC) is expected to come into existence under in-

process Nepal Electricity Regulatory Commission Act, 2008 which shall replace ETFC. As

mentioned in the act, NERC shall have full regulatory framework than ETFC and the roles and

responsibilities of NERC are more clear, focused and detailed compared to ETFC, along with

wider area of intervention and has coined many sources of fund along with Nepal Government.

Table 4-2 presents overview of ETFC and NERC.

Table 4-2: Overview of ETFC and NERC

ETFC NERC

Organizational Structure

The team consist 7 members

Person prescribed by Government of Nepal from non- governmental sector - Chairperson(3 year term)

Director General of the Electricity Development Centre shall be the Secretary of the Commission and the Electricity Development Centre shall work as the Secretariat of the Commission.

The team consist 5 members

Person prescribed by Government of Nepal from non- governmental sector - Chairperson (5 year term)

Secretary of the Ministry of Water Resource shall be the Secretary of the Commission

Functions & Duties

Electricity Tariff Fixation

To fix electricity tariff and other charges to be charged to the consumers against the services rendered to them

To review tariff rates and other charges to be charged to the consumers against the services rendered to them through the generation, transmission or distribution of the electricity by the licensee.

The Commission may change tariff not exceeding more than five percent in the prevailing Electricity Tariff and only once a year.

The fixed tariff rate and other charges as determined by the Commission shall be published in a notification for the general public.

Electricity Tariff Fixation

1.Under this heading it shall

Fix tariff rates and other charges to be charged to the consumers

Acknowledge the licensee for achieving PPA

Transmission and Wheeling Charge Fixation

Fix the cut-off price for Tariff and Other costs/charges for Plants of 1 -10 MW.

2.Investigate tariff allocated for 1 MW projects upon complaints from its consumers

3.Dissemination of tariffs in National Daily Newspaper

4.The tariff once fixed may not be subject to change for a year once decided

Management of Technical Aspect

Ensure National Standard safety and quality of Electricity distribution

Draft laws and acts to ensure effectively managed and organized electricity production, transmission, and distribution

Monitor the electricity service development if it is in line with domestic demand (upto 25 MW)

Maintain competency in Electricity Market and ensure the preservation of consumer rights

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ETFC NERC

Ensure consumer rights

Prevent monopoly in Electricity tariff

Enhance institutional capacity building of licensee for good governance

Advise Nepal Government to develop policy related to electricity and development in the sector of electricity

Monitoring and evaluation of implementation of rules and regulation of licensee performance and work during execution of

Assist in Settlement of dispute among licensee and consumer regarding tariff and other charges

Ensure that licensee pay the penalty if found violating the rules and regulations

Conduct public hearing after fixation of tariff and other charges

Source of Fund

Government of Nepal Government of Nepal

National and International Donors (with Government Approval)

Penalties

Income tax (1 % of Annual Income)

Wheeling Charges

Other sources

Additionally, because Nepal’s electricity rates already rank among the highest in South Asia

(Pyakuryal, 2009 in: Asia Foundation, 2014), increasing rates would most likely be unpopular

among consumers, particularly given the government’s inability to realize the country’s enormous

hydropower potential and continuous load-shedding (up to 12 hours per day, in 2014).

Hydrologic risks are or should be accounted for during tariff negotiations between the developers

and the off-taker. The Government and NEA are generally reluctant to share the hydrologic risks

with the developers, and so far they have opposed developers’ requests to revise tariffs to

accommodate hydrologic changes. Whenever developers generate less than what is agreed in the

PPA, they are obliged to pay financial penalties to the NEA.

Table 4-3: Current regulatory framework on hydropower

Electricity Act (1992)

Governs the use of water for hydropower production.

Establishes a system of licensing.

Sets out the powers, functions and duties of a license holder.

Provides certain financial incentives for license holders.

Sets out the powers of the government.

Electricity Regulation (1993)

Sets out the procedure for obtaining a license.

Deals with the acquisition of house and land and compensation.

Sets out the powers, functions and duties of license holders.

Water Resource Act The umbrella Act governing water resource

22

(1992) management.

Declares the order of priority of water use.

Vests ownership of water in the State.

Provides for the formation of water user associations and establishes a system of licensing.

Prohibits water pollution.

Environment Protection Act (1996)

Requires certain persons/bodies to conduct an EIA or IEE.

Deals with the prevention and control of pollution.

Environment Protection Regulation (1997)

Lists the water related projects required to conduct an EIA or IEE.

Deals with the control of water pollution and pollution control certificate.

Hydropower Development Policy (2001)

Strategy and policy objectives for hydropower development, including:

To maximise benefits in the development of water resources

To minimise the potential risks in hydropower projects

To share the risk, allocating the non-mitigable risks to either the government or private sector based on their capability to bear the risk at the lowest cost

National Adaptation Programme of Action (2010)

Glacial Lake Outburst Flood (GLOF) monitoring and disaster risk reduction

Climate Change Policy (2011)

Setting priorities for climate change reliance and risk disaster reduction, including:

Monitoring the status of glaciers and glacier lakes

Forecasting water-induced disasters and risks created from climate change and providing early warning information

Formulating and implementing design standards for climate resilient construction of bridges, dams, river flood control and other infrastructure.

Project Development Agreement (PDA)

30-35 year contract agreement between the Government and the developers regulating the construction, operation and maintenance of hydropower projects

Defines obligations and risk sharing for the parties in the agreement

Defines who bear the costs of climate-induced events (e.g. GLOFs)

Defines handover obligations

Power Project Agreement (PPA) and Tariff

Agreement on sale rates between developers and off-takers

Hydrologic risks built into the rates but largely shared by developers

Tariff restructuring needs to be approved by ETFC

Flat rate for wet/dry season, no differential tariff for peaking

Currently not formed on a cost-plus basis

Financial penalties paid by operators generating less than minimum agreed in PPAs

23

5 Mapping of Stakeholders and Possible Entry Points

Table 5-1: Stakeholders and possible entry points

Type of adaptation

Option Who implements? Entry Points

1) Existing Plants Existing climate variability (now), plus early climate trends over next decade or two.

Hard measures Aim for low regret but note high cost of retrofit

Flood risk (extreme flow) (will vary with RoR, PRoR and storage, as well as catchment/location)

Raising the dam crest/ dam heighten; Construction of new auxiliary spillways, or through

changes on the existing spillways to increase their discharge capacity.

Install gates, fuse gates, or fuse plugs to keep the same full supply level or even to raise it (more likely to be low regret).

Increased protection for vulnerable structure (e.g. intake structures) (more likely to be low regret).

Check dams

Primarily operators, but may be implemented through guidance or PPAs (Government/ regulatory) or requirement of Banks But difficult to implement retrospectively into guidance and PPA for existing plants

Design Phase; and the Independent Power Producers Ministry of Energy to include these options on hydropower development design guideline Department of Hydrology and Metrology to generate quality data on flood forecast

Sediment risk ( note options will vary with low and high sediment rivers)

Removing sediments to increase reservoir capacity (dredging, flushing)

Retrofitting to improve sediment management (build sediment trapping structures, and sediment routing structures) or continuous flushing device

Check dams, debris basins/traps or reservoirs upstream to trap eroded sediments

Retrofit of turbines before end of turbine lifetime (40 years) if damaged by sediments or to respond to higher flows.

Re-coating turbines.

Design Phase; and the Independent Power Producers Ministry of Energy to include these options on hydropower development design guideline Department of Soil Conservation and Watershed Management to keep the database of basin based sediment flow Technical consultants should be aware with this issue and should incorporate

24

Type of adaptation

Option Who implements? Entry Points

it in the technical details. Low season flow risks (will vary with RoR, PRoR and storage, as well as catchment/location) Retrofit turbines (or upgrade replacement)

Increasing storage: dam heightening or increasing the full supply level (e.g. through installation of fuse gates)

Divert some flows from an adjacent watershed into the reservoir (diversion and water conveyance structures)

Department of Hydrology and Meteorology Independent Power Producers Technical Consultants Hydropower Development Guideline

GLOF risks (GLOF vulnerable plants only)

Retrofit increased protection for structure (e.g. intake structures)

Options to address high flows (see extreme flows) Note also Governmental action (e.g. draining lakes,

etc) (note plants further downstream may not get GLOF, but may get sediment from GLOF) Other

Strengthen transmission lines to improve resilience to load fluctuations, and reduce risk of disruption (e.g. using barriers to protect from landslides)

Interconnection of energy systems within the same country and across regions to build resilience

Ministry of Energy ICIMOD Independent Power Producer Environmental Impact Assessment Nepal Electricity Authority (NEA)

25

Type of adaptation

Option Who implements? Entry Points

Soft measures Aim for low regret, but operational flexibility and supporting legislation needed.

All

Watershed monitoring and data collection On line / real time monitoring (e.g. precipitation data). Improve understanding of current adaptive gaps and

system performance under current climate (no regret)

More information on hydrological flows above 3000 m Voluntary approaches to encourage uptake (e.g.

through industry associations)

Some public good aspects for Government Some operators Bank conditions for loans

Department of Soil Conservation and Watershed Management ICIMOD Financial Institutions

Flood risk (extreme flow)

Enhanced flood warning systems to shut-down (low regret).

Awareness campaigns, e.g. on risk of floods, to improve disaster risk-preparedness (no regret)

Insurance and other financial instruments (building on current)

Reducing reservoir levels before the heavy rain/flood season (although this might result in generation losses),

Developing operating rules that optimise storage/generation and flood attenuation benefits

Sediment risk Collection of sediment data to improve management

Insurance (not for routine sediment and major damage covered above, only insurance for probabilistic large)

Soil and water conservation programs to reduce

IWRM and watershed management Government (part of royalties go to local area)

Department of Hydrology and Meteorology Department of Soil Conservation and Watershed Management Department of Soil Conservation and Watershed Management Insurance Company

26

Type of adaptation

Option Who implements? Entry Points

sedimentation and increase yields

Slope stability monitoring Low season flow risks

Improving weather forecast systems to optimise reservoir operations;

Improving cooperation between different plants, particularly if they operate in a cascade fashion in the same basin;

Insurance and other financial instruments (insurance against drought years? but note under PPA don’t pay under declared DSM drought years)

Reservoir management

Run turbines at lower/higher capacity based on runoff; or for less/more hours if the reservoir can provide some storage

GLOF risks

Enhanced monitoring and early warning systems (how many existing plants?)

Insurance and other financial instruments Awareness raising Use of district royalties to regions and districts to

improve monitoring, install warning systems

Department of Hydrology and Metrology Independent Power Producer Ministry of Energy ICIMOD

Regulatory measures

All

Changing guidance or PPA incentives Switching to different tariffs/price agreements to

incentivise

Independent Power Producer Ministry of Energy

27

Type of adaptation

Option Who implements? Entry Points

Changes in penalty regime (e.g. existing reduction during drought periods, but might need to expand)

Flood risk (extreme flow)

Introducing retrospective changes to design standard for existing plants (difficult)

Introducing periodic and mandatory dam safety reviews (low regret) to alert operators of the need to increase discharge capacity

Sediment risk

Watershed management (e.g. up-stream afforestation)

Low season flow risks

PPA/tariff incentives: currently fixed price dry and wet, government reviewing tariff, encourage storage if space allows.

Integrated Water Resource Management and manage competition for water. ((for conjunctive management of competing water users)

Establishing water management systems like reduced assurance of supply, which may be adjusted for different water users based on whether they would suffer severe economic prejudice.

Increase the opportunities of electricity trading via interconnected power pools;

Demand-side management (benefits from reduced peak and loss of load)

Nepal Electricity Authority Department of Hydrology and Metrology Department of Soil Conservation and Watershed Management

28

Type of adaptation

Option Who implements? Entry Points

Enhanced use of power pools and trading GLOF risks

Regulation for EWS? Retrospective design standard upgrade

2) Planned schemes currently at scoping/ design

Future changes (>2030). Potential for changes in generation (kWh) and revenues, but also risks of low flow and security of supply/risks of damage from high flows Risks occur towards the end of economic lifetime of plant. Discounted and uncertain future benefits (>2030) versus costs today. High uncertainty on future changes.

Hard measures Flood risk (extreme flow) (note that change in return period vary with catchment, plant type)

Low-cost incremental over-design, e.g. extra design contingency for high flows, increase flood storage capability (see current plants).

Increased protection for key structure (e.g. intake structures)

Plan for dam raising and create buffer zones around the reservoir limiting land use to allow dam raising in the future (flexibility)

Plan for supplementary spillway capacity (flexibility) Plan for additional spillways and by-pass tunnels

(flexibility)

Bury power house underground (all or partial) Check dams

Independent Power Producers Technical Consultant s Department of Hydrology and Meteorology Department of Soil Conservation and Watershed Management Ministry of Energy Guideline for Hydropower Design Environmental Impact Assessment Ministry of Population and

29

Type of adaptation

Option Who implements? Entry Points

Dam structure (concrete versus rock filled) Sediment risk (note difference low and high sediment rivers)

Construction of larger outlets, diversion tunnels, check dams or reservoirs upstream to trap eroded sediments, or upstream check dams (these options tend to be costly, but for some such as check dams can get recovery and sale of sediment)

Introduce enhanced trapping devices, e.g. centrifugal separation of fine sediment not gravity Hydrocyclones

Continuous flushing mechanism

More advanced sediment routing structures

Consider parallel outlet tunnels in the design phase (to deal with sediments) (robustness).

Dam heightening (higher cost). Choice of plant, PRoR able to better manage high

sediment loads (sediment advantage) (but note depends on topography)

Low season flow risks

Consider number/size/type of turbines that perform well across a range of streamflow scenarios (high cost) (robustness)

Choice of plant (stie level), PRoR versus RoR versus storage (noting at individual site, choice depends on topography in many cases, but sometimes may be a choice between Ror and PRor

Environment

30

Type of adaptation

Option Who implements? Entry Points

Increasing storage: dam heightening or increasing the full supply level (e.g. through installation of fuse gates)

Consider different alternative for design, i.e. pumped storage plants

Number of units and type: some units more efficient low flows as well as normal, or if smaller number units (4 units vs 1 unit) may get higher efficiency- but trade off optimal efficiency (issue of flow and transport of turbines to plant, i.e. getting larger turbine to remote sites) GLOF risks

Increased protection for key structure (e.g. intake structures)

Set back or raising of structure Build powerhouse and/or other structure

underground (more costly) Design for GLOFs (over design, dam heightening,

spillways, etc).

Soft measures All

Improved hydro-met and Hydrological / Water information systems.

Real time on-line information watershed monitoring and data collection Improve understanding of current adaptive gaps and

system performance under current climate (no regret)

Climate risk screening (site screening to reduce risks)

Department of Hydrology and Metrology Department of Soil Conservation and Watershed Management Ministry of Energy (hydropower development guideline)

31

Type of adaptation

Option Who implements? Entry Points

Climate risk screening tools Flood risk (extreme flow)

Improve data collection and monitoring (low regret): Enhanced flood warning systems (low regret).

Awareness campaigns, e.g. on risk of floods, to improve disaster risk-preparedness (no regret)

Insurance and other financial instruments (building on current);

Operational management (as for current plants) Sediment risk

Sediment monitoring to optimise the operation and design of future plants.

Soil and water conservation programs to reduce sedimentation and increase yields

Slope stability monitoring Low season flow risks Improving weather forecast systems to optimise

reservoir operations;

Improving cooperation between different plants, particularly if they operate in a cascade fashion in the same basin;

Insurance and other financial instruments (insurance against drought years? but note under PPA don’t pay under declared DSM drought years)

Reservoir management

Ministry of Population and Environment

32

Type of adaptation

Option Who implements? Entry Points

Run turbines at lower/higher capacity based on runoff; or for less/more hours if the reservoir can provide some storage

More peaking RoR projects. Integrated Water Resource Management planning GLOF risks

Avoid or reduce siting in high risk areas Enhanced monitoring and early warning systems, plus

awareness raising programmes

Early warning systems

Adopting a river basin approach with respect to monitoring climate risks

Smart licensing along the river basin to account for cascade effects

Changes in maintenance regime to address drying out of reservoir basins and embankment structures

PPA and concession agreement requirements

Regulatory measures

All

Include climate requirements (climate risks) in feasibility studies that submitted to NEA

Develop guidelines for developers on what climatic info should be used for EIA, minimum environmental flows etc.

Develop guidelines on risk screening in guidelines for developers

Include climate risk screening in NEA approval process.

Department of Hydrology and Metrology Department of Soil Conservation and Watershed Management ICIMOD Nepal Electricity Authority

33

Type of adaptation

Option Who implements? Entry Points

Payments for ecosystem services to improve watershed management upstream

Investigate policy and strategy for diversifying energy mix: risk diversification, e.g. different balance of RoR and storage, micro versus large hydro; solar, wind and hydro.

Environmental and social safeguards (i.e. requirement applying to EIA, minimum environmental flows) – though do not include climate risk screening in EIA – too late in the process and needs to be in design and feasibility studies

Change contract to incentives adaptation (e.g. lower royalty or lower equity stake (to recognise climate resilient) or lower free electricity level

Change tariff and pricing structure in PPA with greater differentiation on seasonal/daily, e.g. to incentivise PRoR plants rather than RoR.

Penalty regime, and how might change under a changing climate (e.g. low season penalties relaxed given changing variability – though noting this could incentivise inaction)

Flood risk (extreme flow)

Change design standards, e.g. 1 in 250 rather than 100 (trade off damage and down time versus costs)

Periodic and mandatory safety review (low regret) Sediment risk Low season flow risks

Changes to PPA or pricing (see earlier)

Ministry of Environment and Population Environmental Impact Assessment

34

Type of adaptation

Option Who implements? Entry Points

Choice of plant at system level, e.g. encourage more storage or peaking run of river projects (through various methods, e.g. through PPA incentives)

Integrated Water Resource Management and manage competition for water.

GLOF risks

3) Future potential plants that will be needed on system (2020 to 2050)

Major non-marginal changes in flows or major systematic shifts in risk by 2050, e.g. transformation rainfall, ENSO shifts Unlikely to be addressed through BAU. Very high costs, but very high uncertainty, risk of major costs for impacts that do not happen.

Who document and who monitor and who disseminate

Hard measures GLOF risks

Reducing volume of water in the lakes (system wide) Preventative measures around the lakes (e.g. reducing

material likely to cause surge waves)

ICIMOD and Department of Hydrology and Metrology

Soft measures All

Enhanced meteorological and precipitation trends Enhanced hydromet and WIS Investing in downscaled climate projections Data collection on insurance costs and payouts

Investment in new research programme Continuous update and improvement of design

standards (cycle)

Department of Hydrology and Metrology Department of Soil Conservation and Watershed Management ICIMOD

35

Type of adaptation

Option Who implements? Entry Points

Plant level

Introduction of in situ monitoring Pilot studies with on-site monitoring for learning Research on new technologies System level

Introduction of climate change into system planning (and choice of plant/size/location)

Investing in new models that able to cope with climate variability (WASP is not so good at modelling hydro)

Sediment risk

Sediment monitoring will be important to optimise the operation and design of future plants.

GLOF risks

Enhanced monitoring schemes to track changes in risks (e.g. monitoring, GLOF monitoring R&D)

Early warning;

Regulatory measures

All

Identification and agreement of Institutions to study and document

36

6 References

Asia Foundation (2014): A Political Economy Analysis of Electricity Tariff Restructuring in Nepal.

Retrieved from

https://asiafoundation.org/resources/pdfs/PEAelectricitytariffrestructuringinNepal.pdf

Dixit, A. (2012): Information Use in Nepal’s National Adaptation Programme of Action. World

Resources Institute.

GON (2006): A Handbook on Licensing and Environment Assessment Process for Hydropower

Development in Nepal. Kathmandu, Nepal.

NEA (2014 and 2016): Annual Report. Nepal Electricity Authority (NEA). Kathmandu. Nepal

NPPR (2014): Nepal Portfolio Performance Review 2014: Portfolio Performance for Development

Results. Ministry of Finance, Government of Nepal. Retrieved from

http://www.mof.gov.np/uploads/document/file/NPPR%202014%20Full%20version_2014042507275

8.pdf

Pyakural (2009): Nepal’s binding constraints to growth. UNESCAP.

The Himalayan Times (2016): Electricity bills up by 19 pc. The New York Times. Retrieved from

http://thehimalayantimes.com/business/electricity-bills-up-by-19-pc/

USAID (2014): Country Development Corporation Strategy. Nepal. Retrieved from

https://www.usaid.gov/sites/default/files/documents/1861/CDCS%20Nepal%20Public%20Version%

20September%202014%20(approved).pdf

World Bank (2014): Country Partnership Strategy for Nepal. Nepal. Retrieved from

http://documents.worldbank.org/curated/en/216931468288352238/pdf/831480CAS0P133080Box3

85199B00OUO090.pdf